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Call for Advice No.18 Group and cross-sec<strong>to</strong>ral issues Extract from <strong>the</strong> Call for Advice: The <strong>Commission</strong> Services request CEIOPS <strong>to</strong> analyse what amendments, if any, <strong>to</strong> <strong>the</strong> current Insurance Groups Directive 130 (IGD) would be needed <strong>to</strong> make Solvency II workable for <strong>the</strong> supplementary supervision of insurance undertakings in an insurance group.. This answer analyses specific issues that future legislation will have <strong>to</strong> address or take in<strong>to</strong> account regarding groups: • <strong>the</strong> scope for regula<strong>to</strong>ry arbitrage (I); • capital requirements at group level (II); • Supervisory Review Process (III), and in particular <strong>the</strong> validation of internal models (IV), for groups. Background 18.1 The <strong>European</strong> <strong>Commission</strong> has noted that during <strong>the</strong> 1990’s major changes have taken place in <strong>European</strong> insurance and financial markets as well as in <strong>the</strong> regulation of insurance and financial groups. 18.2 Available evidence suggests that an increasing number of insurance companies are becoming parts of groups. At <strong>the</strong> same time, most decisions concerning risk management and governance of entities belonging <strong>to</strong> groups are often taken by <strong>the</strong> parent of <strong>the</strong> group. These trends highlight <strong>the</strong> importance of supplementary group supervision for <strong>the</strong> efficient and effective supervision at <strong>the</strong> legal entity (solo) level. Hence issues related <strong>to</strong> insurance groups and financial conglomerates also need <strong>to</strong> be addressed as a part of <strong>the</strong> Solvency II project although <strong>the</strong> main focus is on capital requirements and supervisory review at <strong>the</strong> level of <strong>the</strong> individual (solo) entities. Implications for <strong>the</strong> acquis communautaire in this area must also need <strong>to</strong> be considered. 130 Directive 98/78/EC. 202
(I) Regula<strong>to</strong>ry arbitrage Extract from <strong>the</strong> Call for Advice: The <strong>Commission</strong> Services request CEIOPS <strong>to</strong> “analyse <strong>the</strong> scope for regula<strong>to</strong>ry arbitrage 131 in capital requirements between <strong>the</strong> same or similar financial products sold by insurance or by o<strong>the</strong>r financial institutions”. Explana<strong>to</strong>ry text 18.3 As outlined in CEIOPS’ February 2005 update <strong>to</strong> <strong>the</strong> <strong>Commission</strong>, <strong>the</strong> existing literature on <strong>the</strong> <strong>to</strong>pic has been reviewed. With <strong>the</strong> exception of an earlier report from <strong>the</strong> Conference of Insurance Supervisors on suretyship, <strong>the</strong>re is little documented material on actual cases of regula<strong>to</strong>ry arbitrage. Both <strong>the</strong> Basel II and Solvency II projects seek <strong>to</strong> introduce a more risk sensitive framework. As capital charges become increasingly risk sensitive, scope for regula<strong>to</strong>ry or capital arbitrage decreases. 18.4 In introducing new requirements under <strong>the</strong> proposed Minimum Capital Requirement and Solvency Capital Requirement, CEIOPS advises that due regard should be given <strong>to</strong> achieving optimal consistency and compatibility across sec<strong>to</strong>rs. Measures that might encourage arbitrage between institutions should not be introduced. Never<strong>the</strong>less, CEIOPS acknowledges that any standardised approach <strong>to</strong> designing capital requirements is a simplification based on average risk profiles of institutions, be it credit institutions or insurance undertakings. 18.5 CEIOPS envisages that comprehensive internal models, when calibrated in an appropriately harmonised way, would ultimately be able <strong>to</strong> reflect <strong>the</strong> risks most accurately. Initially, only few insurers might develop internal models. In order <strong>to</strong> prevent undertakings from using models inappropriately <strong>to</strong> lower <strong>the</strong>ir solvency requirements ('cherry picking'), supervisors will use <strong>the</strong>ir powers under Pillar II (through <strong>the</strong> Supervisory Review Process) <strong>to</strong> address this issue in an appropriate manner. 18.6 Equally, in <strong>the</strong> case of financial conglomerates, supervisory authorities should ensure that decisions <strong>to</strong> book <strong>the</strong> same or similar products in different institutions are not based solely on any capital or o<strong>the</strong>r arbitrage opportunities that may arise. Appropriate supervisory action should be taken <strong>to</strong> ensure that supplementary solvency requirements are appropriately fulfilled. 18.7 CEIOPS notes that <strong>the</strong> issue of compatibility and consistency relates not only <strong>to</strong> <strong>the</strong> underlying philosophy but also involves <strong>the</strong> question of calibration. 131 What is being discussed here is arbitrage opportunities between different types of institutions for <strong>the</strong> same or similar products. There is no discussion here in relation <strong>to</strong> arbitrage opportunities within an institution by repackaging a product (say, by way of securitisation). 203
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CEIOPS-DOC-07/05 Answers</s
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Style convention The following has
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• Safety measures (CfA 9); • So
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sole purpose is to
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Call for Advice No. 7 Technical pro
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one year). Therefore, capital requi
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perhaps through an explicit additio
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Discounting 7.22 The present value
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exposed to risk fr
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insurance liabilities set by refere
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Profit sharing In practice, for uni
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future cash flows will have <strong
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always have resources to</s
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developed. They would help
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In principle, "the
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8.48 Three alternatives can be cons
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essential part of the</stro
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statistical estimate (with a level
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to use more sophis
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consequence on the
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8.105 In some cases, the</s
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This shall be reviewed, at least an
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ut the exposure <s
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9.15 Solvency II could also employ
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underestimate them
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through a prescribed list. Lists ar
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addition a range of stresses so tha
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(including the Rei
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for review of the
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eligibility criteria, or principles
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• the degree of
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features. 81 TailVaR is an example
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Naturally, the pra
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too few categories
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- Choice of volume measures 10.57 W
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volatility of thei
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those insurers this possible increa
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10.112 Assessing whethe</st
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whenever its effects on the
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scenario techniques to</str
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Operational risk just ratings infor
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Costs and Benefits 11.6 It should b
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individual undertaking is exposed a
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• sensitivity analyses that have
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Partial models and the</str
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11.58 There should be few descripti
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of the SCR estimat
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equirements to imp
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Call for Advice No. 12 Reinsurance
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Reflection in technical provisions
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• provide an estimate of an under
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particular reinsurer(s)’ aggregat
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they auto<
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einsurer to <stron
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should be a reduction in risk regar
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Call for Advice No. 13 Quantitative
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Market risk Equity risk this altern
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B.95 In a scenario-based approach,
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B.106 As an alternative one could t
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where: KTSA = the
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Results from the a
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Solvency ratio prior to</st
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Number of instances Risk group Deta
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Conclusion In general, the<
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where: TP gross = technical provisi
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premium risk, the
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“While proportional reinsurance t
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contribute with any additional info
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E.29 Another way <
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programmes on the
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